A simmering trade conflict between Europe and China is nearing the boil as
state-supported Chinese steel companies ramp up capacity despite drastic
cuts by the rest of the world.

ArcelorMittal, the world's biggest steelmaker, yesterday told its European workforce that production cuts of 50pc would continue indefinitely due to the "exceptional economic environment", raising fears that chunks of Europe's steel industry face closure.

"It is a catastrophe, particularly as management does not say when production will be resumed," Jaques Laplanche, secretary of Mittal's European Works Council, said.

A 166-page report by the European Parliament has accused China of systematic distortion of its steel market, resulting in "irrational capacity extension". This is promoted, it said, by "artificially depressed cost levels" and export rebates.

The European Commission, the EU's trade enforcement arm, said some Chinese measures to support the steel industry are permissible under World Trade Organisation rules but there has been an escalation into "borderline" subsidies.

"The EU is taking this very seriously and we're in discussions with the Chinese," Lutz Gullner, the commission's trade spokesman, said.

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"While steel production is declining all over the world to reduce over-capacity, it is still going up in China. This puts pressure on world markets," he said. The EU steel industry employs 440,000 workers. China's steel exports to the EU were 1.6m tonnes in 2005, 5.6m in 2006, 11.5m in 2007 and almost certainly higher in 2008.

China cut output late last year as steel prices collapsed, but the EU authorities are worried that China is shifting to a strategy of long-term support – effectively opting to offload extra capacity on the rest of the world rather than accepting a surge of unemployment at home.

Beijing says 20m workers have already lost their jobs since the crisis began. Sporadic riots have occurred in the Pearl River industrial hub.

Europe's steel lobby Eurofer said there had been a worldwide dash towards steel tariffs and subsidies since the first G20 summit in November pledged to avoid the sort of "beggar-thy-neighbour" protectionism that blighted the 1930s. Renewed vows of piety at the second G20 last week may prove no better.

Eurofer said India, Russia, Turkey, Egypt, Indonesia, and Vietnam had all imposed steel tariffs, while others have used tricks such as licensing requirements to shut out foreigners. Congress inserted a "Buy American" clause in its stimulus package.

ArcelorMittal said its latest troubles stemmed from the slump in the EU industrial production, down 16.3pc in January. The group relies on sales of flat steel to the car industry, which has suffered a catastrophic winter despite a pick-up in Germany due to bonuses for scrapping old cars. Sales fell 39pc in Spain and 30pc in Britain last month.